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Broken bull bouncing back

Commentary: Cabot Market Letter comfortably bullish again

By

PeterBrimelow

NEW YORK (MarketWatch) — A top-performing letter, whipsawed last year, seems to have regained its confidence.

The Cabot Market Letter, which combines technical market timing indicators and fundamentalist stock picking, is a highly disciplined veteran letter with a strong long-term record. It was one of the first post-2002 bulls to get skeptical about the stock market, in 2007. (See Jan 10, 2008 column). It also turned bravely bullish in early 2009, a call which gave it some bad moments but earned it a place among 2010’s top performers. See Jan. 3, 2011 column.

But Cabot got whipsawed in 2011, a difficult year that finished more or less even after some wild swings. By last December, Cabot’s post-2088 bullishness appeared broken and it was 73% in cash. See Dec. 5, 2011 column.

Over the year to date through February, Cabot is up 3% by Hulbert Financial Digest count 3% vs. 9.37% for the dividend-reinvested Wilshire 5000 Total Stock Market Index (W5000FLT). But over the last 12 months, it was down negative 10.22 vs. a 4.38% gain for the total return Wilshire 5000.

In the longer term, however, Cabot’s strength tells. Over past five years, the letter was up an annualized 9.2% vs. just 1.88% annualized for the total return Wilshire. And over the past ten years, the letter was up an annualized 8.49% vs. 5.08% annualized for the total return Wilshire.

Over the past fifteen years, Cabot was up 7.28% annualized vs. 6.0% annualized for the Wilshire — an edge which compounds smartly.

Even as late as last week, when Cabot published its monthly issue, it was still jumpy, worrying about a possible correction developing, although its model portfolio was by then 86% invested.

Not anymore. Cabot posted last night:

“Remain bullish. The market remains in a firm uptrend, with the buyers clearly in control. All of our market timing indicators look great, as does the action of leading stocks… further potholes like we saw last week would not surprise us in the least, but the main goal at this point is to give your best performers room to breathe, giving them a chance to grow into bigger winners.”

Cabot is still 86% invested but says it might add two more stocks (the model portfolio can have a maximum of 12 stocks). Its last additions:

Cabot has a tendency to philosophize about its market experience. Illustrating what it means by “giving best performers room to breathe,” it argues that each bull market has characteristic winners that announce themselves early on: “In our experience, stocks that run away on the upside early on are good bets to make excellent gains in the weeks and months to come.”

One example:

“Take a look at Baidu Inc.
BIDU, -0.86%
back at the market lows of 2009. The stock built a bottoming base of sorts after the market crash, and then began advancing… and advancing… and advancing. In fact, the stock rallied a huge 13 weeks in a row right after the market bottomed, a powerful sign big investors had set their sights on the stock because of its still rapid sales and earnings growth, along with its humongous potential going ahead.”

“On the daily chart, notice how the stock lifted to new peaks in early January (one of the first stocks to do so) and has, to this point, finished up nine weeks in a row, with most of those weeks closing near their peak on above-average volume.”

Cabot’s conclusion:

“The runaway action seen in a stock like Equinix, as well as in leaders like Michael Kors and Seagate Technology Inc.
STX, -0.27%
is often your best clue that a name has a great chance at morphing into a big winner if the market advance continues.”

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